Sequenom Q2 2014: Income Tax Accounting

Deciphering the recent results from Sequenom requires waiting for the 10Q filing which hopefully will have some of the disclosures not included in the earnings release. One of the complicating earnings components, income taxes, need not wait for the 10Q so I'll take a shot at explaining what transpired.

Accounting presentation rules require the disclosure of results from discontinued operations to be separately disclosed from continuing operations. This separation makes it easier for investors to analyze continuing operations. The separation of the two is what leads to the confusing tax reporting this quarter.

The sale of the Bioscience division was completed this quarter and resulted in a pretax gain on the sale of $23.8 million. Generally accepted accounting principals require a calculation of the tax impact of this gain, which the company determined (stand alone basis) was $9.6 million. So the first step is complete. The gain was reduced by the tax impact of the gain and reported separately.

Next we look at the annual projected annual income tax provision. Sequenom is expected to report a loss for the year. Given the rules for deferred tax assets, they will again report no tax provision aside from some minor amounts. In effect, the $9.6 million tax cost from the sale of the Bioscience division will be recovered through operating losses from continuing operations. The confusion comes from asking the question: Why did they only report a tax benefit of $7.1 million? That requires an understanding of interim reporting for taxes.

Interim reporting for income taxes, in simple terms, is a two step process:

Calculate the expected tax provision on the projected results for the entire year. This calculation yields an effective tax rate that equals the tax impact as a percentage of income (loss) before tax.

Apply the effective tax rate to the year-to-date income (loss) to determine the interim tax provision.

In Sequenom's case, they expect to have a tax benefit from continuing operations of $9.6 million, which "recovers" the cost of the sale. They have estimated that 74% of that should be recognized through the June quarter. Intuitively makes sense given the trajectory of the year and the expectation of break even results by year end. Another way of looking at this is to realize that the company is telling us that roughly 74% of the expected loss for the year has been recorded through June.